We believe that China's service industry is poised to flourish and chain brands offer value as an investment. Under the new normal of lean growth, the advantages of chains over monomers have expanded, and service chains have a lot of room for growth in the future, among which restaurants and hotels are expected to breed large-capitalization enterprises, and leaders with comprehensive strength and iterative capabilities are expected to win.
summary
The service industry is booming, and it's time for chain brands. In the past few years, we have observed the emergence of more and more large-scale chain brands, but compared with overseas, the number of Chinese service brands exceeding US$10 billion is still far behind that of the United States (e.g., only 1/2 in China vs. 3/9 in the United States). In the U.S. consumer market, service brands are the next outlet after product brands tend to mature; The expansion of the market capitalization of the Japanese restaurant sector also confirms that it can deliver investment returns that can outperform the index. We expect China's service sector to continue to thrive and provide investment value.
The supply and demand sides jointly help the chain to set sail, and the advantages of monomer are further expanded. We believe that the chain format has the two characteristics of standard model and brand effect, and is expected to continue to expand its advantages (by improving scale advantages and reducing fulfillment costs) after the transformation to the new normal of lean growth in the extensive era. On the demand side, community agglomeration has become the "growth cornerstone" of the chain format, and changes in consumption habits have boosted the popularity of chains. On the supply side, the increasingly complete offline locations, supply chain and information infrastructure, and organizational management forms (such as a more standardized and mature franchise model) are expected to support the continuous growth of the chain format.
We believe that restaurants and hotels have the potential to breed more large-cap companies. 1) We divide the chain format into three categories: service brand chain, product brand chain and channel chain, generally speaking, brand chain has stronger consumer stickiness and profitability than channel chain, among which the product brand standardization dimension is more advantageous, and the service brand has more room for growth in the future. 2) Focusing on the internal service brand, under the framework of "large space + wide audience + low threshold + scale", we believe that catering and hotels are the tracks that are relatively easiest to nurture large companies; The payback period of catering is shorter and the stability is weaker, and the hotel life cycle is longer and more stable; The growth period and maturity period in the life cycle have a certain investment value, the growth period has the highest return on investment, but at the same time the risk is also higher, it is necessary to focus on the same-store operating performance under the rapid expansion of the number of stores, the maturity period is a more stable investment choice, in addition to the improvement of profitability, dividends, repurchases, etc. are expected to contribute to the return on investment.
The core competitiveness and winning rule of chain brands: we believe that the comprehensive strength + iterative ability of products, operations, brands and organizations is the core, and the quality-price ratio route and the quality premium route have their own focus: the former meets the basic needs, pays more attention to the supply chain and cost efficiency, and is easier to form a positive cycle; The latter emphasizes comprehensive strength and brand building, and needs to balance non-standard experience and standardized management. In the era of more normal growth, simply reducing "quality" or "price" is not a sustainable way to deal with competition, and the barriers are reflected in the comprehensive victory of price, quality and profit margin.
risk
Weaker-than-expected recovery in spending power; deterioration of the competitive landscape; Enterprises have failed to improve their management to cope with changes, etc.
body
The service industry is booming, and it's time for chain brands
Large-scale chain brands have emerged, and there is still room for comparison with overseas. In the past 5-10 years, we have observed the emergence of more and more large-scale chain brands, and many brands have continued to expand their stores during the epidemic: according to Euromonitor, the number of restaurant chain stores in China has increased from 224,000 in 2014 to 636,000 in 2023, an increase of nearly 2 times, the number of Mixue Bingcheng stores in the tea industry has exceeded 30,000, and the compound growth rate of Luckin stores in the coffee industry has reached 50% from 2021 to 2023, achieving the achievement of exceeding 10,000 stores in 2023. The number of stores and revenue surpassed that of Starbucks China; In the field of hot pot ingredients, Guoquan Shihui will also achieve more than 10,000 stores in 2023 after 6 years of development...... Compared with the "Made in China" catch-up with Europe and the United States, only 5 Chinese companies in the consumer discretionary service category have a market value of more than US$10 billion (vs. 27 in the United States), specific to the hotel/catering/cruise/healthcare services sub-industry, there are only 1/2/0/1 Chinese companies with a market value of more than 10 billion US dollars, compared with 3/9/2/8 in the United States, China's service chain enterprises still have a lot of room to be released.
Chart: The growth rate of stores of some chain enterprises from 2016 to 2023
Note: 1) The number of stores of Michelle and Lucky Coffee brands in China, the number of stores in operation in Chinese mainland, the number of stores in Chinese mainland China, and the number of Chow Tai Fook brand stores in Chinese mainland; 2) The number of stores of Leke Sports, Tustin, and Bawang Chaji refers to Jihai Big Data and Narrow Door Dining Eye, and the number of stores that are very busy with snacks is the sum of the number of stores of each level in the monthly store rating announcement, and the rest comes from the company's announcement; 3) Honey Snow Bingcheng and Tustin have been calculated since 2019, Tea Baidao and Bawang Chaji have been calculated since 2020, Leke Sports has been calculated since 2016, Luckin Coffee has been calculated since 2018, and Atour has been calculated since 2018; 4) Except for the number of stores using 9M23, the rest will use the number of stores at the end of 2023
Source: Jihai Brand Monitoring, Narrow Door Dining Eye, Company Announcement, CICC Research
Chart: The number of stores of some leading chain enterprises from 2015 to 2023
Note: 1) The number of stores of Michelle and Lucky Coffee brands in China, the number of stores in operation in Chinese mainland, the number of stores in Chinese mainland China, and the number of Chow Tai Fook brand stores in Chinese mainland; 2) The number of stores of Leke Sports, Tustin, and Bawang Chaji refers to Jihai Big Data and Narrow Door Dining Eye, and the number of stores that are very busy with snacks is the sum of the number of stores of each level in the monthly store rating announcement, and the rest comes from the company's announcement; 3) Honey Snow Bingcheng and Tustin have been calculated since 2019, Tea Baidao and Bawang Chaji have been calculated since 2020, Leke Sports has been calculated since 2016, Luckin Coffee has been calculated since 2018, and Atour has been calculated since 2018; 4) Except for the number of stores using 9M23, the rest will use the number of stores at the end of 2023
Source: Jihai Brand Monitoring, Narrow Door Dining Eye, Company Announcement, CICC Research
Chart: Number of chain restaurants in China from 2014 to 2023
NoteSource: Euromonitor, CICC Research
Chart: There is still room for China's chain companies with a market capitalization of more than $10 billion compared to the United States
Note: The number of companies with a market capitalization of more than US$10 billion by country/region, market capitalization as of 2024/6/18, industry classification according to the Global Industry Classification Standard (GICS)
Source: Bloomberg, CICC Research
The service sector has become the biggest engine of economic growth and will continue to flourish. With the growth of Chinese per capita GDP and disposable income from 46,912/20,167 yuan in 2014 to 89,358/39,218 yuan in 2023, the people's growing demand for a better life has promoted the rapid growth of the tertiary industry, according to the data of the National Bureau of Statistics, the proportion of added value of the tertiary industry has increased steadily in the past decade, reaching 54.6% in 2023, exceeding 50% for 9 consecutive years, contributing to economic growth vitality. However, China's current share of the service sector (about 53%) is still lower than the global level, and even lower than the 77.6% of the United States in 2021 and the 72.2% of the United Kingdom in 2022. Looking ahead, we expect the service sector to continue to flourish as the masses develop consumption habits and the supply of services improves.
Referring to the development stage and experience of mature overseas consumer markets, we believe that China's service industry has growth potential and investment value in the future.
► In the U.S. consumer market, service brands are the next outlet after product brands tend to mature. Most of the stages before 2000 when the U.S. consumer industry achieved high growth and stock price returns: the food and beverage industry expanded before 1950, and overseas expansion became a new stimulus from 1950 to 1970; From 1970 to 2000, the leading retail industry integrated offline channel resources, and used scale advantages and quality control to build large supermarket complexes for rapid development; Most of the leaders of the beauty and personal care industry were founded in 1960 and later, enjoying the dividends of globalization and relying on brand power to go overseas. After 2000, the product format was subject to demand changes and supply saturation, and most of them entered a stage of steady growth. After the basic food and clothing and physical consumption desire are satisfied, the spiritual and experiential demand has driven the service industry to heat up significantly since 2000, and more listed companies have appeared in the catering, hotel and tourism industries and created higher stock price returns.
► In the Japanese F&B market, the expansion of the market value of the sector also confirms that it can bring considerable investment returns. Since the bursting of the economic bubble in the 1990s, the total market value of the catering sector has increased from about US$11 billion in 1995 to about US$52.1 billion in 2023, which comes from the increase in the number of listed companies (from 42 in 1995 to 97 in 2023), and more importantly, from the return on investment dividends that can be enjoyed in the secondary market. The Japanese restaurant sector returned about 4.4% from 1996 to 2023 (compared to the Nikkei 225 Index's return CAGR of about 1.9% over the same period).
► In the 2023 list of the world's top 100 brands released by Interbrand, service brands can also have high value.
Chart: CAGR of stock price growth per decade for U.S. consumer companies by type of consumer representative
Note: 1) Stock price data Costco from 1981, Booking from 2000, Marriott from 1997, Hilton from 2013, Intercontinental from 2003, Choice and YUM! Brands from 1997, Starbucks from 1992, Domino's from 2004, and Chipotle from 2006
Source: Bloomberg, CICC Research
Chart: Historical market capitalization expansion and sector returns in the Japanese restaurant sector
Note: The sector return is based on market capitalization-weighted summary of the increase in the price of each stock in the sector plus the reinvestment of dividends
Source: Bloomberg, CICC Research
Both sides of supply and demand are in harmony, and the chain format is expected to continue to grow and develop
The chain format has the two characteristics of standardization and branding, and its advantages are further expanded compared with monomers
Chain vs. Monomer: Static comparison, chain has two major advantages: standard mode and brand effect. 1) Standardization helps chain formats have certain advantages over single stores in terms of supply chain and store management: chain brands usually adopt unified raw material procurement, logistics and distribution, inventory management and other measures in the same or similar areas to help stores dilute operating costs and form a certain scale effect on the premise of maintaining stable supply quality; In addition, the chain brand's more standardized store expansion process, single-store model and business suggestions provide strong help to stores, and we believe that its existing experience and standardized system are expected to help single stores reduce operational pressure. 2) The brand effect of the chain format may help it effectively accumulate consumer trust and improve profitability: We believe that the brand exposure brought by the chain format based on the unified store image display and online streaming publicity is expected to continuously strengthen the consumer awareness of the brand, and then bring a certain low-cost drainage ability and premium ability, and improve the profitability to a certain extent.
► In the case of hotels, chain brands can bring better business performance and payback cycles. Based on the assumptions of the single-store model of independent hotels and franchised hotels, we found that chain hotels generally have higher occupancy rates than individual hotels based on better product quality and a wider membership system, resulting in more outstanding RevPAR performance. Although franchised chain brands need to pay a certain franchise fee, their corresponding people-to-room ratio, consumables and other costs are lower, which boosts its profit level.
Chart: Comparison of single-store models for single and chain hotels
Note: 1) The above is CICC's calculation data; 2) Measured in terms of years
Source: CICC Research
In dynamic comparison, the era of extensive development has switched to the new normal of lean growth, and the advantages of chain brands are expected to be further amplified. In the past, in the era of extensive development and high growth, the requirements for efficiency and fine management were not so high, and both chain and single operations could achieve good results. As we gradually enter the era of more normalized growth, on the one hand, individual operations face more challenges in sustainable profitability, and on the other hand, some chain enterprises continue to consolidate their own capabilities and gradually expand their cost advantages over individual and small and medium-sized chains, so we may see a further increase in the chain rate and concentration.
► Taking catering as an example, chain leaders have improved their scale advantages, reduced performance costs, and expanded their advantages over monomers and competitors. In the past development process of Luckin, due to the scale effect, stronger chain management capabilities (such as digital-driven system promotion and refined management capabilities) and brand potential energy advantages, the cost of a single cup (including raw materials, labor, rent and other operating costs) has been continuously reduced, we estimate that 3Q23 is further reduced to about 10 yuan compared with 2Q23, which is not only a gap compared with a single store, but also has an advantage over Cudi, which has a larger number of stores, which brings better and more stable profitability to Luckin. It also provides support for further market share.
Chart: Comparison of Luckin Coffee's single-store model with Cudi Coffee
Note: The above is CICC's calculation; Luckin is a model of directly operated stores; Cudi is a single-store model during the "9.9 every day" activity from May to July, and does not consider the headquarters commission fee for franchise stores; The actual payback period of the franchisee will be shown in the figure
Source: Company announcement, company official website, Finance Associated Press, CICC Research Department
Chart: Cost per cup comparison between Luckin Coffee and Cudi Coffee
Note: The above is CICC's calculation; Luckin is a model of directly operated stores; Cudi is a single-store model during the "9.9 every day" event from May to July, and does not consider the headquarters commission fee for franchise stores
Source: Company announcement, company official website, Finance Associated Press, CICC Research Department
After the epidemic, investors' risk appetite may be reduced, and chain formats with strong anti-risk ability are expected to become the preferred choice of investors. We have observed that some investors believe that the operational stability and the probability of obtaining sustainable returns from franchised chain brands are higher to a certain extent than those of independent entrepreneurs, so chain formats with better quality and stronger risk resistance are continuing to increase their market share. Euromonitor data shows that the chain rate of the catering industry in mainland China has increased from about 14.7% in 18 years to about 20.4% in 23 years; According to data from the China Hotel Association, the hotel chain rate in mainland China (based on the number of rooms) increased from about 26% in 19 years to about 41% in 23 years. In terms of brand, we see that Huazhu/Atour had 3,172/674 stores in reserve as of 1Q24, both hitting record highs; According to an interview with Zhou Zhaocheng, vice chairman of the board of directors of Haidilao, China Entrepreneur magazine, Haidilao has received thousands of franchise applications since it opened for franchise on March 4, 2024, even if the investment amount of a single store is as high as about 10 million yuan.
Online vs. offline: The importance of offline layout may become prominent again after the epidemic, and it is often difficult for offline businesses to "win takes all". 1) According to the China Internet Network Information Center, by the end of 2023, the number of Internet users in mainland China will reach 1.09 billion, and the Internet penetration rate will be about 77.5%, which is at a high level overall. Based on the slowdown in the marginal growth of the number of netizens and the increasingly fierce competition for online customer acquisition, we believe that the online traffic dividend may gradually fade (we estimate that the growth of the number of active users of the top e-commerce platforms will slow down, and the overall unit customer acquisition cost will show an upward trend). 2) On the other hand, we believe that the offline format in the "post-epidemic" era is expected to provide consumers with an integrated experience of "scene + product + service". For example, coffee brands such as Starbucks not only provide coffee drinks to consumers, but also provide customers with offline spaces such as work and socializing. KTV, secret rooms and other formats create diversified offline experience entertainment scenarios for consumers; Shopping malls are also increasing the proportion of food and beverage formats to attract customers (we estimate that the average area of food and beverage in large shopping malls has increased to about 30-40%). 3) Unlike the major leaders in the online format, which are easy to quickly seize market share and user awareness, we found that offline stores are relatively limited in the customer base that can be reached, and it takes some time for a single brand to increase its influence and market share. At the same time, the offline format involves more links at the level of operation and management, and has higher requirements for management details, so we believe that it is usually difficult for the offline format to form a pattern of "winner takes all", and the success probability of companies starting with the online format to enter the offline market is not too high.
On the demand side: community gathering provides the foundation for the chain format, and changes in consumption habits promote the chain to be favored
The gradual increase in urbanization rate has brought about a demand base, and community commerce may become one of the "growth cornerstones" of chain formats. 1) According to the National Bureau of Statistics, China's urbanization rate has increased from 37.7% in 2001 to 66.2% in 2023. 2) Compared with the United States and Japan, we find that the agglomeration attribute of urban residents in China is stronger, which in turn gives rise to a more unique form of community-based organization and community business model. According to the research data of Qicheng Capital, the living area of 10,000 households in China is about 1-1.5 square kilometers, which is smaller than that of Japan (about 3 square kilometers) and the United States (about 10-30 square kilometers), while the average population of China exceeds that of the United States and Japan, and at the same time, the residential area of 1 square kilometer in mainland China roughly corresponds to about 1 billion yuan of disposable income and 500 million yuan of purchasing power. We believe that different types of fields, such as community commerce centered on the living and working areas where residents gather, may become the "growth cornerstone" of the chain business.
Chart: Comparison of the living range and per capita population of 10,000 households in China, Japan and the United States
Source: Titanium Media, Qicheng Capital, CEIC, Seventh National Population Census, Ministry of Internal Affairs and Communications of Japan, Nikkei Chinese Network, U.S. Embassy in Beijing, CICC Research
Chart: Comparison of different types of business formats
Source: Community Business White Paper, CICC Research, April 2022
Changes in C-end consumption habits may boost the chain format to be more favored. 1) Consumers are becoming more rational and pragmatic: According to Deloitte's 2023 China Consumer Insights and Market Outlook White Paper[1], more than 90% of consumers compare prices and use coupons during the shopping process, and only about 6% of consumers say that they hardly compare prices before making purchases. 2) Product quality and functionality have always been the core of consumers' attention: According to the 2022 McKinsey China Consumer Survey Report, consumers will focus on the quality and efficacy of products when buying food or non-food products. 3) Brand awareness is one of the important factors influencing consumers' purchase decisions: McKinsey research shows that "whether the brand is well-known" and "whether the brand is reliable" are one of the important factors for consumers to consider when choosing products (28% of consumers will consider whether the brand is reliable when buying food products; 33% of consumers consider whether a brand is well-known when buying non-food products). We found that consumers still have a certain pursuit of high-quality products, but they have developed in a more rational and objective direction when making purchase decisions, and pay attention to brand endorsement. We believe that more mature chain stores are usually able to provide consumers with products with a certain "quality-price ratio" advantage, and based on the brand value that has been created, store products under the chain format may be more favored by consumers.
Supply side: The basic conditions to support the development of chain formats are becoming more and more complete
There are more and more points for offline chain formats to take root and sprout. In addition to the unique community business mentioned above, the scale of shopping malls, another important place for chain stores, is gradually expanding. According to data from the China Chain Store & Franchise Association, the number of shopping malls with an area of more than 30,000 square meters in mainland China has approached 6,700 in 2022 (CAGR: 27.7% from 2000 to 2022). According to the statistics of the Chain Store & Franchise Association, the per capita area of shopping malls in China is close to the level of developed countries such as Japan and Europe[2]. We believe that the number of points represented by shopping malls and community businesses continues to increase, or provide potential store space for chain formats.
The gradual maturity of infrastructure such as cold chain logistics and SaaS information system has laid the foundation for cross-regional replication of chain formats. 1) Supply chain and cold chain logistics system: Taking the catering industry as an example, the mainland has formed a relatively complete catering supply chain system, through the digitally transformed supply chain platforms such as Shuhai and Meicai, the cold chain logistics system such as SF cold chain, Jingdong cold chain, Huading supply chain and the central kitchen prefabricated food processing platform such as Qianwei Central Kitchen jointly link upstream raw material manufacturers and downstream retail ends, helping chain restaurants to expand and replicate in multiple regions. 2) Information system: POS machines and mobile payment reduce the difficulty of cash management and enhance financial transparency, and the popularity of SaaS system effectively promotes chain enterprises to expand their management radius. We have observed that in recent years, SaaS systems in the catering industry have accounted for an increasing proportion of vertical SaaS in the industry, and iResearch data [3] shows that in 2021, the catering industry accounted for about 5% of the vertical SaaS in the industry. According to data from the New Technology Research Institute and 36Kr [4], the proportion of the catering industry in the industry's vertical SaaS will increase to about 10% in 2022.
The gradually mature and evolved organizational management form escorts the expansion of the chain format. We believe that the direct sales model may set the tone for the brand and products of the enterprise in the early life cycle, but with subsequent expansion, the franchise model may become an effective organizational management method to expand brand awareness and geographical coverage. Specifically, we believe that the franchise model promoted by brands with brand power and relatively high-quality management systems may achieve a win-win situation between brands and franchisees: 1) for brands, cooperation with franchisees can avoid the problem of high operating costs under the asset-heavy model to a certain extent; At the same time, the overall self-management under the direct sales model makes the headquarters management radius limited, while the franchise model can give full play to the self-driving force at the end of the organization, and can also effectively revitalize the franchisee's capital and property resources, so as to speed up the expansion of stores and improve the ceiling of store opening. 2) For franchisees, chain brands with competitive advantages can bring them brand traffic, supply chain (e.g., catering brands provide supply chain resources for stores) and store management (e.g., hotel brands export management experience for stores and dispatch store managers). In addition, the brand side has also gradually gotten rid of negative consciousness such as "quick recruitment" and "cutting leeks" in franchise management, and has carried out more standardized exploration. On the basis of the gradual improvement of management tools and management concepts mentioned above, we have noticed that in recent years, more and more brands have been opened to join by direct sales, such as Heytea, Haidilao, Jiumaojiu, Helensi, etc., have successively announced the opening of franchises, and the organization and management matrix of chain enterprises has become increasingly rich.
Decoding the chain format: Restaurants and hotels are expected to give birth to more large-capitalization companies
Overview of the chain format: the brand chain stickiness is stronger, and the service chain has more room for growth
We believe that the chain format can be roughly divided into three categories: service brand chain, product brand chain and channel chain.
Chart: Overview of chain business classification and representative companies of corresponding sub-industries
Source: Companies' official websites, CICC Research Department
We found that high-quality brand chains usually have stronger consumer stickiness, and we also paid attention to the fact that some channel chain companies are constantly polishing their supply and marketing channels and continuing to build their own barriers. 1) For brand chains directly involved in design and production, the products and services they provide are usually heterogeneous, so we believe that brand chains are easier to construct consumers' psychological cognition, and high-quality brands with a certain degree of scarcity may be able to form a benign interaction with consumers, thereby strengthening consumer stickiness. 2) In addition, we have noticed that in recent years, some enterprises that originated from channel chains are actively seeking business breakthroughs, such as the continuous accumulation and selection of products by leading supermarkets, strengthening the ability of procurement and marketing, focusing on product quality, and devoting themselves to the development and construction of their own brands (according to data from the China Chain Store & Franchise Association, the proportion of China's top 100 private label sales in supermarkets has increased from 3.2% in 18 years to 5.0% in 22 years). We believe that it has more opportunities to enhance consumer stickiness and raise the profit ceiling than channel companies that purely earn channel price differences.
To a certain extent, the profitability of brand chains may be more prominent than channel chains. By comparing the samples of listed companies in the two chain formats, we find that the net profit margin of brand chain enterprises is generally in a higher range than that of channel chain enterprises. Taking 2023 as an example, the net profit margin attributable to the parent of the leading channel chain enterprises such as supermarkets and pharmacies that have achieved profitability is generally in the mid-single digits (Yifeng Pharmacy/Hongqi Chain/Laobaimin/Baiguoyuan respectively: 6.3%/5.5%/4.1%/3.2%), in addition to Yonghui Supermarket, Lianhua Supermarket, and Suning Tesco recorded losses. In contrast, the profitability of brand chain enterprises is better (Huazhu/Haidilao/Bubble Mart/Aier Ophthalmology recorded net profit margins attributable to the parent company of 18.7%/10.9%/17.2%/16.5% respectively). We believe that it is mainly due to the attributes of different business formats that lead to a certain gap in the bargaining power of enterprises to the upstream and to consumers. Brand chain enterprises complete most of the aspects of brand positioning, product/service design, production and sales relatively independently, among which some leading enterprises with strong brand power have strong price dominance ability in the face of upstream suppliers or end consumers; However, the commercial nature of traditional channels is biased towards commodity circulation, and the space for obtaining price markups is relatively limited.
Chart: Although there are differences in characteristics between industries, we believe that the profitability of brand chains may be better than channel chains to a certain extent
Note: 1) The horizontal axis in the figure represents the number of stores operated by each listed brand chain/channel chain company, the vertical axis represents the net profit margin, and the bubble size represents the revenue volume of the listed company; Red is the service brand, gold is the product brand, and gray is the channel brand; 2) The net profit margin is calculated as net profit attributable to the parent company/total income of the company; 3) 2023A will be used for the selection period, except for 1-3Q23 for Mixue Bingcheng/Gu Ming, 2023.2.28-2024.2.29 for Good Future, and 2023.3.31-2024.3.31 for Chow Tai Fook;4) The revenue volume of listed companies is RMB million, and for companies whose financial reporting currency is USD or HKD, the exchange rate on the last trading day of the financial period used to calculate the net profit margin will be used to convert it into RMB
Source: Company announcements, prospectus submitted to the Hong Kong Stock Exchange in January 2024 by Michelle Bingcheng and Gu Ming, prospectus updated by Chabaidao in April 2024, CICC Research Department
Focusing on the internal brand chain, the product brand may have more advantages in the standardization dimension, and the future growth space of the service brand may be greater. In contrast, we believe that the degree of standardization of product brand chains is usually higher, because the production side is more unified, the store-side management is less difficult, and it is easier to form a scale effect, and offline stores are often only one of the sales channels; In contrast, the scene and experience attributes of the service brand chain itself have raised the requirements for the supply side, and there are indeed more challenges and difficulties in terms of the degree of production standards. However, looking at the overall development cycle of product brand chains and service brand chains, we believe that most of the current service brands in mainland China are in a more growth stage, and there may be more room for growth in the future.
Dismantling the service brand chain from an investment perspective: category differences, growth space and investment point selection
The business logic of the category itself determines the width of its track, and it pays attention to the advantageous track with a wide audience, low threshold and easy scale under a large space. In the service brand chain, we believe that the major sub-categories may have great differences in specific business logic, while the categories with outstanding underlying business logic can often broaden their track width and are expected to give birth to large-capitalization companies that can pass through the cycle. We break down several major service chain categories (hot pot, Western fast food, Chinese fast food, coffee, tea, hotels, medical institutions, educational institutions, automobile services, and beauty services) in detail as follows, and try to summarize the framework from the perspective of supply and demand, and compare and analyze the advantages and disadvantages of the development of each segment of the service chain format, and the opportunities for leading companies to expand market space:
► [Perspective 1] Based on demand-side considerations, we believe that: 1) The growth space of the track and the development potential of the market determine the store opening and growth ceiling of leading enterprises in the industry to a certain extent. 2) Categories with a wide audience, low prices and high frequencies, and stronger stickiness and lower fashion risks are more attractive.
From a comprehensive perspective, we believe that benefiting from a wider range of consumer groups, low prices and high frequencies and other factors, the space for hotels, restaurants and other track industries is relatively broad, but it is also necessary to pay attention to the rapid change of consumer demand in the catering category and face high "fashion risks". At the same time, we believe that medical institutions, beauty services, educational institutions and other tracks have high stickiness and high customer unit value among specific groups, which is also worth paying attention to.
► [Perspective 2] Based on supply-side considerations, we believe that: 1) Policy requirements, capital investment, site selection and other store opening thresholds may directly affect the speed of store opening of leading brands and determine their store opening ceilings, and it is usually difficult to increase the number of stores in the track with low requirements for hardware environment, less necessary investment, and low policy thresholds. 2) Industries with lower difficulty in scaling are more likely to breed large enterprises, while tracks with lighter assets, lower dependence on labor, lower difficulty in comprehensive store management, and lower difficulty in supply chain management mean that it is easier to scale.
From a comprehensive perspective, we believe that the threshold and scale difficulty of opening stores in catering, hotels, and automobile services are relatively low.
► [Perspective 3] The size of the demand-side market space and the difficulty of large-scale replication on the supply side will ultimately be reflected in the indicators such as chaining rate, net profit margin and payback cycle, and the advantageous track may have a relatively higher chaining rate, higher net profit margin and faster payback cycle. For direct brands, store profitability is directly related to the company's overall profit level; For franchise brands, store profitability and payback cycle directly affect the franchisee's enthusiasm to join, and then affect the scale and profitability of the headquarters.
Based on the above three perspectives, we believe that catering and hotels are the tracks that are relatively easy to breed large companies in the service chain format, and we can also pay attention to the opportunities for some outstanding companies to achieve rapid growth under a low base in the process of increasing the chain rate of other service chain formats such as medical institutions, educational institutions, automobile services, and beauty services. In terms of catering sub-categories, we believe that beverages (coffee and tea) and Western-style fast food are relatively better than hot pot and Chinese fast food, and are better than most other catering sub-categories.
There are also differences between F&B and hotel formats: F&B payback periods are shorter and less stable, while hotels have a longer life cycle and are more stable. Based on the relatively small single-store investment, most F&B brands have a shorter payback period than hotel brands (we estimate that the average payback period of Western fast food, freshly made tea, coffee and other industry leaders is about 2/1-2/1-2 years, while the average payback period of hotel leaders is about 3-5 years). However, at the same time, catering brands are also facing more uncertainties, the demand side has the fashion risk of consumers constantly trying new things and changing tastes, and the supply side has a lower threshold and more fierce competition, and shorter leases (3-5 years for restaurants vs. 8-10 years for hotels) lead to weak stability for franchisees to continue to join the same brand under the franchise model, so generally speaking, the life cycle of hotel brands is longer than that of restaurants, and the change of pattern is relatively slower.
Chart: Comparison of business logic of major service chain categories
Note: 1) According to the number of red stars, it can be divided into three grades: "high-medium-low", which represents the degree of the track in the corresponding comparison items, and the more stars there are, the more prominent the track performance in this index, such as the consumption frequency in consumer behavior, that is, the higher the frequency, the more consumer groups in the track, the more advantages the track has; 2) According to the number of yellow squares, it can be divided into three grades: "high-medium-low", which represents the degree of the track in the corresponding comparison item, and the smaller the number of squares, the more prominent the performance of the track in this indicator, such as the difficulty of site selection in the threshold of a single store, that is, the lower the difficulty of site selection, the greater the number of potential stores that can be opened
Sources: Red Meal Brand Research Institute, Narrow Door Restaurant, China Hotel Association, iiMedia Consulting, Meituan Food, Carmen, Statista, China Chain Store & Franchise Association, China Hotel Association, National Health Commission "2022 China Health Statistical Yearbook", Good Future official website, Beauty Industry New Latitude "2022 China Beauty Industry White Paper", related company announcements, CICC Research Department
Taking tea as an example to dismantle its value chain, assuming that a cup of tea of 15 yuan, the gross profit margin of the franchise store is 65%, and the gross profit margin of the supply of tea brand enterprises is 30%, the gross profit margin of the industrial chain of the two links can reach 75.5%, which can enable the participants of the two links to achieve a relatively considerable profit margin level on the basis of the terminal price that is not very high.
Chart: Tea value chain dismantled
Source: Tea Baidao, Gu Ming Company Announcement, CICC Research Department
Single-store model of major F&B brands: We estimate that leading restaurant chain brands maintain a good single-store profitability, such as Haidilao with a payback period of about 1-2 years, Taier with a payback period of about 1-1.5 years, Pizza Hut with a payback period of about 2-3 years, KFC with a payback period of about 2 years, and Chabaidao with a payback period of about 1-2 years. There are certain differences in the single-store model of different catering sub-tracks, such as the demand for hot pot brands is greater, the large store model is the mainstay, and the single-store income is higher; The supply of raw materials for Western-style catering is relatively simple, and the material cost rate is low; The production process of ready-made beverage products is simple and the store service requirements are low, so the employee cost ratio is low; The rental cost ratio of each brand depends on the bargaining power of the brand, the location and other factors.
Chart: Single-store model calculation of major F&B brands
Note: Pizza Hut, Domino's China, and KFC use the average daily order volume and average unit price; Haidilao adopts the turnover rate and customer unit price; Stirring hot pot, Taier, and Jiumaojiu adopt the turnover rate and customer unit price; Tea Baidao and Luckin Coffee use the average daily cup volume and cup unit price
Source: Company announcement, CICC Research
Store space of major F&B brands: We estimate the store opening space of major F&B brands based on the comprehensive dimensions of industry space, brand positioning, growth stage and operation and management capabilities of different F&B sub-tracks, and we estimate that the number of stores of most brands still has room for growth of more than 50%.
Chart: Estimation of store opening space of major F&B brands
Source: Company announcement, Narrow Door Dining Eye, CICC Research Department
Single-store model of core hotel brands: Based on the same property assumptions, we calculated the single-store model of the leading mid-range and mid-to-high-end hotel brands All-Season and Atour, 1) we found that the top chain brands have the ability to output a 3-5 year return on investment cycle under the property conditions with superior geographical location and suitable rental level; 2) We believe that the essence of mid-to-high-end brands is to exchange relatively high cost per room for more RevPAR premiums to cope with the pressure of return on investment under higher rental levels; On the other hand, mid-range and budget hotels place more emphasis on standardization and operational efficiency, and achieve more extreme cost control by reducing the ratio of people to room and the cost of consumables, so as to record a more prominent profit level.
Chart: Single-store model of core mid-range and mid-to-high-end hotel brands
Note: The CRS fee/gross revenue in the channel cost assumption for the full quarter is calculated as 4.8% based on the proportion of CRS * CRS fee standard, which exceeds the upper limit of CRS charge/gross revenue for the whole quarter by 3.5%, so we assume that it is 3.5%
Source: Company announcement, CICC Research
Estimation of the opening space of core hotel brands: We select the current leading brands in different grades of economy, mid-range and mid-to-high-end, Hanting, Quanji, and Atour to calculate the potential opening space. Based on the data of Ctrip.com's operating stores as of the end of December 2023, we estimate the potential store opening space of the above three brands from the supply side of the property in the business district. The core variable is the number of target stores in a single business district, and we mainly refer to the following factors for the prediction of this variable: 1) the number of hotels in the same price range as the brand in a single business district provides a market space ceiling reference; 2) The number of hotels of the current brand in a single business district provides the basis for calculation; 3) Considering the differences in the density of tier-level hotels in different cities, we expect that the number of target stores in a single business district in high-tier cities may still be higher than that in lower-tier cities, but the number of target stores in a single business district in lower-tier cities is expected to increase faster than the actual number of high-tier cities. Combined with the above factors, we estimate the number of target stores in a single business district and obtain the potential overall store opening space, and we estimate that the total number of potential stores of the three major brands of Hanting, Quanji and Atour will be 4,657/3,361/2,142 respectively, which is about 47/65/140% higher than the estimated number of stores as of December 2023.
Chart: Estimation of store opening space for core economy, mid-range and mid-to-high-end hotel brands
Note: The hotels with the same price band of each brand are slightly different according to the city line level: Hanting specifically refers to the first-tier and new first-tier cities 200-450 yuan; second-tier cities: 130-300 yuan; 130-250 yuan in third-tier cities; Fourth-tier cities: 100-210 yuan; 100-200 yuan in fifth-tier cities; The specific reference for the whole season is 300-550 yuan in first-tier cities, 250-500 yuan in new first-tier cities, 200-400 yuan in second-tier cities, 200-300 yuan in third-tier cities, and 150-230 yuan in fourth- and fifth-tier cities; Atour specifically refers to 500-750 yuan in first-tier cities, 250-650 yuan in new first-tier cities, 300-500 yuan in second-tier cities, 300-450 yuan in third-tier cities, and 250-400 yuan in fourth- and fifth-tier cities
Source: Ctrip, CICC Research
It is worth noting that the store opening space is generally calculated based on the population/business district density, the penetration rate of comparable competing products, the penetration rate of advantageous areas, the competitive position of the brand, etc., but at the same time, it is also very important to verify and adjust the store opening space calculation through the changes in the store opening speed and the single store model in the subsequent store opening process. In the overall expansion stage of the industry, there may be an underestimation of the store opening space; And when the company's management ability is about to be challenged, there may be an overestimation of the store opening space.
We believe that most service brands will go through different stages of the life cycle, and the investment logic and focus of each stage will be different. Considering the ceiling of the demand-side market space, the continuous iterative evolution of consumer preferences, and the boundaries of supply-side enterprise management capabilities, we believe that most service brands will go through different stages of the life cycle. We take F&B and hotel brands as an example and roughly divide their life cycle into different stages, which we believe may have different investment logics and key focus indicators.
► Introduction period: 1) Clear positioning: In the initial stage, catering brands need to determine the product categories (such as hot pot, casual catering, fast food, beverages, etc.) and routes (such as cost-effective routes, brand premium routes, etc.), and hotel brands also need to clarify their product grades (such as economy, mid-range, mid-to-high-end, etc.), price ranges and core audience groups (such as business travelers, leisure people, etc.), and different positioning directly affects their subsequent development paths. 2) Polishing the model: The number of stores in operation during the introduction period is usually small, and because the product and operation model are not yet mature, the store version usually undergoes more iterations, and the brand marketing activities in the early stage of store opening are more frequent, so we believe that this process may record some losses. Since 1Q23, Intercity has initially opened stores in Wuhan, Zhengzhou, Shenzhen, Shanghai and other places, and adopted a single-store model with certain differentiation in different regions to determine the best store expansion model in the final comparison, we believe that a clear brand positioning and a more prominent single-store model make the brand favored by franchisees (as of 4Q23, the number of intercity brand pipeline hotels reached 53, Compared with the end of 1Q23, it increased by 43). 3) Focus on indicators: For F&B and hotel brands, we believe that we should focus on them at this stage
► Growth period: After the trial and error of the introduction period, when the product and operation model gradually mature and form a set of standardized operating processes, the brand begins to enter the growth period. 1) Store expansion: We believe that the number of brand stores is expected to increase rapidly at this stage, and the encryption diversion effect has not yet appeared under the low base of the number of stores, and the profit margin may be optimized under the scale effect. As of 1Q24, the number of hotels in operation of the Atour brand reached 1,302, maintaining an average annual store growth rate of about 30%, maintaining its leading position in the mid-to-high-end market and continuing to seize market share. 2) Brand potential energy: We believe that under the expansion of scale, the brand potential energy may continue to accumulate and strengthen with the enhancement of offline exposure, and higher brand exposure will also help to achieve consumer awareness occupancy, absorb a wider range of store groups, and increase store revenue. 3) Focus on indicators: For catering and hotel brands, we believe that this stage should jointly focus on the speed of store expansion, in addition, catering brands need to pay attention to the process of store expansion, hotel brands need to pay attention to Generally speaking, this stage is expected to achieve both performance growth and valuation, and then generate a higher return on investment.
► Mature stage: We believe that the number of stores in the mature stage may gradually approach the ceiling, and the pace of brand expansion will slow down. 1) Business focus: For F&B brands, this stage is mainly to reduce costs and increase efficiency by optimizing product mix to boost same-store and improve operational efficiency; For hotel brands, this stage requires product optimization and product renovation iterations for aging stores to remain competitive. 2) Focus on indicators: For F&B and hotel brands, we believe that this stage should be jointly focused onGenerally speaking, the valuation at this stage is relatively stable, mainly relying on stable performance growth and certain dividend buybacks to achieve stable investment returns.
► Recession/Second Growth Curve: Changes in consumer demand at this stage led to the company's existing products being unable to meet the core demands of consumers, with same-store revenue of F&B brands declining, same-store RevPAR of hotel brands declining, and the number of stores decreasing due to the weakening profitability of single stores. We believe this is a phase of focus that needs attention
Chart: Service chain life cycle and indicators of interest at different points in time (taking F&B and hotel brands as examples)
Source: CICC Research
Case 1: Starbucks. 1) Introduction period (1971-1992): The business model was transformed from coffee bean retail to freshly brewed coffee sales. 2) Growth stage 1 (1992-2000): rapid expansion of stores, high growth to support high valuation. The median P/E TTM at this stage reached 66x, and the average annual compound return of the stock price was about 39%. 3) Growth stage 2 (2001-2008, or brand adjustment period): store growth slowed down, financial crisis and operation quality decline led to same-store decline, and valuation declined. At this stage, the average annual compound return of the stock price is about -1%. 4) Maturity period (2009 to present): steady growth in revenue and improvement in profit margin. The main driver of the stock price rise at this stage is EPS, with an average compound annual return of about 26%.
Case 2: Haidilao. 1) Introduction period (1994-2015): Establish a differentiated positioning with intimate service as the core, continue to explore the organizational structure, and steadily expand the number of stores. 2) Growth period (2016-2019): The number of stores expanded rapidly, and the brand potential remained high, driving same-store growth, enjoying a significant valuation premium. 3) Brand adjustment period (2020-2022): misjudging the epidemic and declining management and operation quality due to excessive expansion. 4) Maturity period (2023-present): The organizational adjustment has been effective, and it is expected to maintain steady growth.
The growth and maturity stages in the F&B and hotel tracks have certain investment value. Based on the above analysis, we believe that: 1) the stage with the highest return on investment may be the growth stage, but at the same time, the risk may also be higher, and it is necessary to pay attention to the same-store operating performance under the rapid expansion of the number of stores. 2) The mature stage is a more stable investment option, and the return on investment may not be as good as that of the growth stage, but the stability is higher. Referring to overseas catering and hotel leaders, in addition to improving profitability, we also found that dividends and buybacks are expected to contribute to investment returns.
Looking for the future chain brand of thousands of stores: core competitiveness and winning rules
The comprehensive strength of products, operations, brands, and organizations + iterative ability is the core
Core competitiveness evaluation system: product, operation, brand, organizational iteration ability. The company has formed a strong internal strength by continuously polishing the above capabilities to achieve continuous customer acquisition, reasonable profitability and benign and sustainable store expansion.
► Strong product power: The direct driving force for consumers to choose the brand is the foundation of brand development. In service consumption, products, service quality and price are important factors affecting consumer satisfaction. With the development of platforms such as Dianping and Xiaohongshu, the information asymmetry between merchants and consumers is being weakened, and the quality of products and services will directly affect brand reputation. For chain brands, outstanding demand insight capabilities, product research and development capabilities, and supply chain management capabilities are indispensable elements to support high-quality products and services.
► Strong operational strength: Determining the profit performance of a single store and the development strategy of the store is the basis for the sustainable and benign scale expansion of the brand. Highly consistent product and service delivery and good single-store profitability rely on: 1) store streamlining and standardized SOP design to reduce the difficulty of store operation and maintenance and ensure consumer experience; 2) Active and efficient human resource management system to stimulate the enthusiasm of employees and alleviate the rigidity of labor costs; 3) Flexible application of digital tools to achieve efficient supply chain management, accumulation and analysis of operational data to support the company's business decisions. The store development strategy mainly includes store expansion strategy and store site selection, and reasonable planning of store opening speed and flexible location selection is conducive to increasing brand exposure and saving rental costs.
► Strong brand potential: Establishing consumer awareness is the deep moat of the brand. The establishment of brand potential energy needs to be based on strong product strength and strong operation ability, and continuously convey and strengthen the brand concept to establish a unique consumer brand awareness. According to Deloitte's 2023 China Consumer Insights and Market Outlook White Paper, short video platforms, brand official websites, social media, and review and evaluation apps are the most important channels for influencing consumer decision-making, second only to the shopping mall/physical store experience.
► Organizational iteration ability: After the expansion of the brand scale, it is necessary to implement personnel improvement and adjust the organizational structure in a timely manner to adapt to the pace of development. The content of organizational iteration includes: 1) personnel improvement, including the iteration of personnel in the organization, and the continuous learning and self-iteration of managers, so that the enterprise can maintain high market acumen and choose reasonable development strategies; 2) Adjustment of organizational structure: After the enterprise develops to a certain scale, there may be problems such as rigid organizational structure and low operational efficiency, and the organizational structure needs to be adjusted in time according to the pace of development; 3) Adjust and strengthen corporate culture and values, unify the internal development direction, and reduce the loss of talents.
Chart: Evaluation system of core competitiveness of chain brands
Source: CICC Research
Ability needs to adapt to different stages of development in order to do well, grow big, and live long. Compared with the manufacturing industry, the chain format may not have a strong scale effect, and even diseconomies of scale will occur at a certain stage of development, which is embodied in: 1) the increase in headquarters and store personnel may lead to low manpower efficiency; 2) When entering a new market, it may face problems such as differences in consumption habits between regions (such as taste preferences, customs, etc.) and low brand awareness; 3) Store location depends on resource endowment, and in the process of scale expansion, it may face high rental costs and site selection competition; 4) The supply chain may be limited by the supply radius (such as the coverage radius of central kitchens, warehousing, etc.). Therefore, we must continue to improve our capabilities to adapt to different stages of development, and our ability to keep up with the scale or lead the scale, so that we can do well, grow big, and live long.
► Haidilao: Achieve brand turnaround through "disconnection" and adjustment of management mechanism. Haidilao, a leader in the hot pot industry, has experienced three steps from rapid expansion leading to deterioration of operation, management optimization to reversing business performance: 1) opening stores too quickly in 2020 and 1H21 (opening more than 500 stores and more than 300 stores respectively), and at the same time, management capabilities have failed to keep up, resulting in a decline in brand potential and store efficiency; 2) In order to turn around the operating performance, the management proposed the "Woodpecker Plan" in 2021/11, which included the closure of about 300 stores and the large-scale opening of new stores when the turnover rate was less than 4; In terms of KPI assessment, on-site performance (such as food safety, store hygiene, etc.) and comprehensive data (such as single store revenue, profit, etc.) are taken into account, and the frequency of assessment is increased, and the survival of the fittest is strictly enforced, and the salary structure of "low base salary + high dividend" is promoted in 2H22 to fully mobilize the enthusiasm of front-line employees (such as 23 years of spontaneous launch of concert drainage, "subject three" dance and other activities to boost brand exposure); In terms of organizational structure, the regional management system was restored, the management radius was shortened, and some functional departments were incorporated into the headquarters, and the corporate culture was emphasized; 3) Over the past 23 years, the turnover rate has increased significantly, with the overall turnover rate reaching 4.2 in 2H23, a month-on-month increase of nearly 30%, and we estimate that the overall turnover rate from January to April 24 increased by more than 20% year-on-year; In 22 years, the net profit attributable to the parent company turned losses into profits, and the non-net profit margin deducted exceeded 10% in 23 years.
Chart: Haidilao's 2019-2023 semi-annual turnover rate and non-net profit margin
Note: Turnover rate in the second half of the year = annual turnover rate * 2 - turnover rate in the first half of the year; In 2021 and beyond, the non-net profit margin will be deducted and the special sea will be divested; The non-net profit margin is net profit attributable to the parent company excluding foreign exchange gains, net gains (losses) from financial assets at fair value through profit or loss, and gains/income from the redemption of long-term bonds
Source: Company announcement, CICC Research
The different emphases of the quality-to-price ratio route and the quality-premium route
Quality-price ratio route: focus on meeting basic needs; Focus on the supply chain and maximize the scale effect. Quality-price ratio: route chain brands focus on meeting the basic needs of the greatest common divisor (such as satiety, thirst quenching, etc.) at a lower price. Business categories usually have a higher consumption frequency and a wider audience; Stores take the path of "small profits but quick turnover", and the room for improving the profitability of a single store is generally limited, but it can play a scale effect through store expansion and further strengthen the advantage of quality-price ratio; Generally speaking, it is more suitable to adopt the franchise model, and then achieve the optimal cost and efficiency by integrating or building the supply chain by itself.
► Mixue Bingcheng: The efficient integrated industrial chain creates a high quality-price ratio. According to CIC Consulting data, as of the end of September 23, the total number of stores in China exceeded 29,000, ranking first in the low-end tea market (the unit price of products is concentrated below 10 yuan) (in terms of the number of stores), and the market share of China's ready-made tea market was 20% (in terms of GMV) in 1-3Q23, ranking first among China's ready-made tea brands. In 2022, the company purchased a total of about 111,000 tons of lemons, oranges, milk powder, tea, and green coffee beans, and the procurement cost of milk powder and lemons of the same type/quality was 10% and 20%+ lower than that of the same industry. The scale effect further consolidated its cost-effective advantage, so that the company obtained considerable revenue and profit scale and growth: 1-3Q23 revenue +46% year-on-year to 15.4 billion yuan, net profit attributable to the parent company +48% year-on-year to 2.4 billion yuan (the industry's second-largest adjusted net profit of 1.04 billion yuan in the same period).
► Luckin: Scale effect and supply chain construction significantly reduce the cost of raw materials and ensure product quality. With the increase in the number of stores and orders, Luckin continued to expand the scale of raw material procurement (in 2021 and 2022, the number of green coffee beans imported by Luckin exceeded 15,000 tons and 30,000 tons, respectively[5]; In September 2022, we signed a letter of intent to purchase 45,000 tons of coffee beans in Brazil in the next three years[6]), and our bargaining power continues to improve under the scale effect, and we estimate that the material cost of a single product of Luckin will decrease from 5.6 yuan in 2020 to 5.1 yuan in 2023, a decrease of 8% (considering that the proportion of non-coffee products in self-operated stores in product sales has been declining year by year since 2020, and non-coffee products in self-operated stores include lower-cost dessert roasting and other products, we estimate that the actual decline may be even greater). In addition, Luckin continued to invest in the construction of upstream factories to ensure product quality stability and reduce production costs, and in March 24, Yunnan Baoshan Coffee Fresh Fruit Processing Plant with an annual fresh fruit processing capacity of 5,000 tons was officially put into operation; With the official commissioning of Kunshan coffee roasting base in April 24, the company's total annual roasting capacity exceeds 45,000 tons.
Chart: Luckin's material cost per product is decreasing year by year
Note: The material cost of a single product is calculated as (total material cost - joint operation cost)/total number of products sold in the current year
Source: Company announcement, CICC Research
Chart: The number of Luckin products sold has increased rapidly
Source: Company announcement, CICC Research
► UNIQLO: Strong supply chain management and control capabilities support the transformation of brand positioning from "low price and low quality" to "low price and high quality", and the brand potential and profitability have been significantly improved. 1) UNIQLO's first store opened in 1984, positioning low-priced basic clothing (the price of goods is only 1,000 yen or 1,900 yen), facing the mass consumer market, since the 90s of the 20th century, in line with the pressure environment of Japanese consumption, the number of stores has recorded rapid growth, and the number of directly operated stores in Japan has increased rapidly from 16 in FY1990 to 111 in FY1994. 2) However, UNIQLO's early supply chain model was mostly direct procurement from suppliers, and the product quality was poor under the low price constraint, and the efficiency of FY1995-1998 directly operated stores and the group's net profit margin decreased year by year. 3) In order to further improve product quality, UNIQLO gradually strengthened supply chain management, established a monitoring system from product planning, production, logistics distribution and sales, and with the opening of the FY1999 phenomenal polar fleece sweater (priced at only 1,900 yen) and the opening of the first urban store in Harajuku, Tokyo, UNIQLO completely reversed the brand image of "low price and low quality", and the floor efficiency of directly operated stores increased steadily from less than 600,000 yen/square meter to about 1 million yen/square meter. UNIQLO's gross profit margin in Japan increased from a low of 38% to nearly 50%.
Chart: The floor effect of UNIQLO's directly managed stores in Japan
Note: Data after FY2014 are not disclosed; The fiscal year ends at the end of August each year
Source: Company announcement, CICC Research
Chart: UNIQLO Japan gross and operating margins, and Fast Retailing net margin
Note: Uniqlo Japan's gross profit margin data after FY2019 has not been disclosed; The fiscal year ends at the end of August each year
Source: Company announcement, CICC Research
In order to ensure a consistent consumer experience, the quality and price are more highly standardized than those of chain brand products and services, which minimizes the difficulty of store operation and makes the single-store model have strong replicability.
► Hanting: The benchmark for cost efficiency in the hotel industry. As the No. 1 brand of China's economy hotels (3,744 hotels in 1Q24), we pay attention to Hanting's focus on off-site standardized output and gain large-scale supply advantages from it. 1) In terms of supply chain centralized procurement: Huazhu has exceeded 100 million yuan in the overall centralized procurement of materials and services in 23 years, and plans to plan that about 95% of the total supply chain procurement volume in 24 years will come from direct procurement by upstream leading enterprises with zero price difference. 2) In terms of operation and management: the company dispatches store managers to be responsible for the daily operation and maintenance of stores, and superimposes the digital management systems such as the company's full-brand global cloud system, employee incentive system, franchisee capital management system, and internal irregular sampling inspection mechanism to help stores around the country maintain a high level of standardization, bring consumers a more unified accommodation experience, and optimize the cost efficiency of 0.17 to achieve the same service quality.
► Saizeriya: Highly standardized restaurant operation SOP to reduce staff costs. In the face of Japan's high labor cost environment, Saliya focused on the key indicator of "working hour production efficiency" (the gross profit generated by the store in a day divided by the total working hours of all employees on that day) at the restaurant management level, and assessed the "working hour production efficiency" rather than turnover for store managers, so as to simplify the operation process of store employees and improve the level of standardized operation to minimize staff costs. From FY2005 to 2019, the average single employee of Sasiya's Japan business contributed more than 10 million yen in sales and more than 6.5 million yen in gross profit, leading the Japanese catering industry. The employee cost ratio has been on an upward trend for a long time, but it is still slightly lower or flat than its peers.
Chart: Individual employees contribute to sales in Japanese food and beverage companies
Note: Saizeriya is the data of the Japanese business, and the data of other companies is the overall data; Saria's fiscal year ends at the end of August each year, Quansheng Holdings and Dongliduo end at the end of March each year, and Skylark ends at the end of December each year
Source: Company announcement, CICC Research
Chart: Gross profit contributed by individual employees of Japanese food and beverage companies
Note: Saizeriya is the data of the Japanese business, and the data of other companies is the overall data; Saria's fiscal year ends at the end of August each year, Quansheng Holdings and Dongliduo end at the end of March each year, and Skylark ends at the end of December each year
Source: Company announcement, CICC Research
The route with a certain quality premium in the middle price segment: emphasizing comprehensive strength and brand building. In addition to satisfying the basic needs of consumers, such brands can also meet other spiritual needs (such as socializing, pleasing oneself, arousing emotional resonance, etc.); Consumers are sticky and willing to pay a premium. Such brands often build brand ecology based on strong product strength and occupy consumer awareness with strong brand potential; Behind the product power is the integration and optimization of the entire supply chain, and the construction of brand potential energy relies on high-frequency and high-quality marketing and innovation to achieve emotional interaction with consumers.
► Bawang Tea Queen: Focus on raw leaf fresh milk tea, with outstanding brand potential shaping ability; Supply chain and operational capabilities support the rapid expansion of stores. Founded in 2017, Bawang Chaji focuses on raw leaf fresh milk tea, and continues to strengthen the brand potential (such as positioning the national style tea drink to occupy consumer awareness, iterating the brand logo and visual image, launching a calorie calculator to meet consumers' health demands, vigorously investing in brand marketing, and rapidly expanding stores nationwide and opening flagship stores in core business districts to enhance brand exposure), as of May 20, 2024, the number of registered members of Bawang Chaji worldwide has reached 130 million[7]. In addition, the large-scale product strategy and the continuous improvement of supply chain and operation capabilities of Raw Leaf Fresh Milk Tea support the rapid expansion of stores, and ensure the continuous consolidation of brand potential through high-quality and consistent product strength and operation level. In terms of supply chain, Bawang Chaji focuses on the layout of the tea supply chain; In terms of store operation, the new generation of automated tea-making equipment has effectively improved the efficiency and standardization of cup serving (the taste error rate has been reduced to 2 per thousand, and the average meal serving efficiency has been increased to 8 seconds per cup7). The company expects GMV to exceed 20 billion yuan in 2024 (GMV will reach 10.8 billion yuan in 2023)[7].
► Xue Kee Roasted Goods: Optimize raw materials and modern technology, and strengthen comprehensive strength by relying on store experience and product innovation. Xue Ji Roasted Goods was established in 1992 and underwent modernization transformation in 2019. Xue Kee strictly controls product quality from the source, such as chestnuts only use high-quality varieties from specific regions, and the local experience of the agricultural product procurement team is more than 30 years; Tree nut products and quality are limited and customized at the farm level. At the same time, the layout of self-built factories, the optimization of the technological process, and the final baking process to the store to achieve process standardization and maximize the taste. Xue Kee creates a consumer atmosphere and creates a brand affinity image through large stores, and according to the Xue Kee Partnership Mini Program, the standard area of its stores is about 80 square meters; The product display is beautiful and enhances consumers' willingness to buy; At the same time, Xue Ji actively leads product innovation and creates fashionable nut products, such as milk dates, Xinjiang gray dates + almonds, etc., and constantly expands to create product freshness.
It is not only cost efficiency, but a balance between non-standard experience and standardized management. For brands in the mid-price segment and with a certain quality premium, price is not the only or even the most important consideration for consumers, and the front-end expression of the brand needs to focus appropriately on giving consumers a non-standard experience and establishing a unique brand awareness, so as to achieve irreplaceability and polish differentiated competitive advantages. However, at the same time, the management side still needs a set of relatively standardized systems and processes to achieve store replication, otherwise the instability of service quality will also damage the brand image.
► Atour: A leading brand of mid-to-high-end hotels, creating a personalized accommodation experience based on a standardized model. 1) Atour refers to the law of peak when designing the service process, and refines 17 service touchpoints (including SMS greetings before arrival, "serving tea" service at check-in, localized breakfast and packaging service, supper, etc.), making the service system more standardized and replicable. 2) At the same time, Atour gives each grassroots employee a certain discretion and budget (500 yuan or one day's room rate) to meet the personalized needs of customers or deal with emergencies, so as to cultivate employees' sense of ownership, ensure the quality of front-line services, and avoid problems that are reported layer by layer but difficult to solve. In addition, the company has established a review mechanism of "bad reviews do not stay overnight" (all employees need to rectify and analyze the bad reviews of OTA and its own channels before 10 p.m.), find problems in time and improve and innovate in the follow-up service process.
In recent years, as we have gradually entered an era of more normal growth and consumers have become more rational, we have observed that some of the higher-premium brands that have thrived at some stage in the past have encountered certain challenges, with price reductions and fierce competition, and our view on these dynamics is as follows:
► Consumer demand is rich and diverse, multi-level, to meet the different needs of consumers, reasonable profit margins in the low-medium-high price segment of the brand has its market. Of course, corresponding to the income structure, generally speaking, the lower the price segment, the larger the market size. If sustained growth is desired, appropriately expanding the price range and expanding the population is sometimes a necessary tool. Of course, if the positioning span is large, it may face challenges in consumer cognition, the company's own genes and organizational capabilities.
► Businesses with quality-price ratios are more likely to form a positive cycle. The unit price of business customers with a quality-to-price ratio is relatively low, and most of them are rigid demand scenarios, and the target consumer group has a larger range and is easier to scale. With the expansion of scale, the dilution of raw material costs and headquarters expenses brought about by scale effect will improve the company's profitability, and enterprises have the ability to consolidate the quality-price ratio advantage (maintain low prices while improving product quality) by continuously strengthening the supply chain construction, forming a positive cycle of scale, quality-price ratio and profitability.
► In the process of dynamic competition, simply reducing "quality" or "price" is not a sustainable way. On the one hand, consumers tend to be rational, does not mean to compromise to "quality", Uniqlo, Coca-Cola, Luckin and other brands are in the radiation of the mass market while maintaining a high quality, it is the pursuit of high quality can force the company to establish a stronger competitive advantage in the supply chain, organization and management, etc., and constantly enhance the brand reputation and cater to people's constant yearning for a better life, simply by reducing "quality" to achieve "price" while ensuring a reasonable profit margin will have the risk of long-term loss of market share; On the other hand, if the "price" is simply reduced on the basis of maintaining the same quality, it is impossible to achieve a stable level of profitability, especially in the franchise model, which may lead to the defection and business fluctuations of franchisees, and may lead to consumers' misunderstanding of reasonable prices, which is not a sustainable way. The real barriers may come from the ability and scale effect of forming a certain brand premium and low price to obtain traffic on the basis of solid internal strength such as products, operations, brands, and organizations that match the positioning, and finally reflect the comprehensive victory of the three dimensions of price, quality, and profit margin (opponents cannot surpass them in the three dimensions at the same time).
Chart: Businesses with a price-to-quality ratio are more likely to establish a positive feedback loop system
Source: CICC Research
Risk Warning
Investment risk: weaker-than-expected recovery of consumption power; deterioration of the competitive landscape; Businesses are failing to improve their management to cope with change.
► Weaker-than-expected recovery of consumption power: If the overall consumption level of residents is still under pressure and the recovery of consumer confidence is insufficient, it may lead to the passenger flow and sales volume of offline chain enterprises in various formats falling short of expectations, and may not be able to generate the expected revenue.
► Intensifying competition in the chain format: If the competition landscape in the various sub-industries of the offline chain format gradually deteriorates, it will become a major challenge to stand out in the fierce competition environment and achieve sustainable business growth. If the pace of expansion is slower than expected, it may lose the opportunity to seize high-quality resources, reduce the influence of the enterprise, and then lead to the competitiveness and long-term profitability of the industry cannot meet expectations.
► Enterprises fail to improve their management capabilities to cope with changes: With the continuous growth of chain enterprises' store scale, the requirements for employee management and expansion methods will be further increased, which will test the existing management model and efficiency. If the management efficiency and quality decline in the rapid expansion of scale, it will affect the company's brand image and operating performance.
[1] Deloitte, 2023 China Consumer Insights and Market Outlook White Paper: https://mp.weixin.qq.com/s/4OWoAZwFSQqB2o9PIgb9iw
[2] China Chain Store & Franchise Association: http://www.ccfa.org.cn/portal/cn/xiangxi.jsp?id=445119&ks=%E8%B4%AD%E7%89%A9%E4%B8%AD%E5%BF%83&type=33
[3] iResearch, "2022 China Enterprise SaaS Industry Research Report": https://www.iresearch.com.cn/Detail/report?id=4119&isfree=0
[4] 36Kr Research Institute, "2023 China Enterprise SaaS Industry Development Research Report": https://www.36kr.com/p/2390421005898368
[5] Securities Daily: https://finance.sina.com.cn/jjxw/2022-11-24/doc-imqqsmrp7397724.shtml
[6] Xinhuanet: http://www.xinhuanet.com/tech/20230220/18ff8884cd844e3c8aa73789217fd5e2/c.html
[7] Xinhuanet: http://www.xinhuanet.com/tech/20240521/06d5f25a39334fb0b967592e0029476d/c.html
Article source:
This article is excerpted from: "Service Chain is the Right Time, Looking for the Future Thousands of Store Brands" released on June 21, 2024
林思婕 分析员 SAC 执证编号：S0080520080005 SFC CE Ref：BPI420
刘凝菲 分析员 SAC 执证编号：S0080522040004 SFC CE Ref：BSD697
蒋菱钢，CPA 分析员 SAC 执证编号：S0080523040002 SFC CE Ref：BSD447
赖晟炜 联系人 SAC 执证编号：S0080122080102 SFC CE Ref：BUN389
Legal Notices